Purpose of a Payroll System

Process your payroll through the payroll system.

The employee can file a private lawsuit, or a complaint with its local U.S. Department of Labor, Wage and Hour Division, if her employer does not pay her appropriately for services rendered. Furthermore, the Internal Revenue Service can penalize employers that do not withhold, report and pay employment taxes appropriately. To ensure compliance with employment and payroll tax regulations, the employer implements a payroll system.

Significance

The employer cannot process its payroll without a payroll system. The latter is the channel that enables the former to generate paychecks and comply with payroll laws. The employer can choose whichever system it favors, but it must be efficient to ensure accurate and timely paychecks. Therefore, the employer must assess its needs, such as the size of its payroll; and options it will offer, such as direct deposit, before choosing a payroll system.

Types

Three types of payroll systems exist: manual, in-house computerized and outsourced. The manual system requires the payroll person to perform all payroll duties by hand; in-house computerized requires him to use payroll software to process the payroll; and the outsourced method requires the employer to hire a payroll service provider to process the payroll.

Components

The time keeping system for a manual payroll typically requires employees to complete standard time sheets or punch a time clock. The payroll person computes the time card/time sheets by hand, enters all payroll data into the system manually, processes wages, pay adjustments and deductions by hand, and prints paychecks and pay stubs manually.

Payroll software calculates wages and deductions based on the data the payroll person enters into the database. This method speeds up payroll processing and reduces errors. It also stores payroll reports and employee payroll data.

For a set fee, the payroll service provider handles the employer’s payroll tasks. This can range from payroll processing only, to payroll processing and benefits and payroll tax administration. This method eliminates paying for, and maintaining, on-site payroll staff and payroll software.

Implementation

The manual system is inexpensive to implement. Generally, only time sheets, a typewriter (if desired), blank checks, calculator and stationary are needed. But, the payroll person should have solid knowledge of payroll tax and payroll processing laws since all computations are done by hand.

The implementation for an in-house computerized system requires investing in payroll software. Depending on the size of the payroll, one payroll person or an entire staff may be needed. Furthermore, if the payroll and the software are complex, the employer may have to provide the staff with training.

The outsourced system requires signing a contract with the payroll service provider; the contract shows the latter’s services. The employer must give the payroll service power-of-attorney if the latter will be handling its benefits and tax matters. For direct deposit purposes, the employer must provide the payroll service provider with its bank account information.

Warning

If the employer uses a payroll system that does not suit its needs, inaccurate payroll processing occurs. For example, if the payroll includes hundreds of employees, a manual system would not be best; outsourcing the payroll or an in-house computerized system would be better.

References

• Mediawiley: Creating a Payroll System
• U.S. Department of Labor: Minimum Wage and Overtime Pay
• IRS: Penalty and Interest